With over 27,000 funds and ETFs (all share classes), over 10,000 individual stocks, plus closed end funds, UITs, hedge funds, limited partnerships, etc., there is certainly no shortage of inventory. Selecting the investments to use in constructing a portfolio, therefore, can be a daunting task. Frequently, reps in larger firms will follow the advice of their back office. An independent advisor, however, must either determine this his own, or seek those services from a third party. I've always preferred to do my own research.

Everyone has an opinion, but sometimes one's opinion is biased in one direction or another. For example, a manager of a long-only stock fund, who stays fully invested in stocks, might tend to be bullish while appearing on CNBC, even if he’s bearish in his own heart. If this manager were to 'sound the alarm,' the fund could experience large outflows. A bond fund manager, on the other hand, might be bearish on the economy as this type of environment tends to be good to bonds. Today, bond yields are near historic lows, so future price appreciation may be somewhat muted.

Before constructing a portfolio, it's important to determine an outlook for the future. Then you should decide which categories might do well if your forecast comes true. Where are the opportunities today? Here's one advisor's opinion.

United States

The mortgage market will suffer as the amount of foreclosed properties puts pressure on home prices. This could put a damper on consumer sentiment. Personal savings is high, indicating there is a lot of cash still on the sidelines. Moreover, corporate cash balances are high, indicating some reluctance to hire and/or reinvest. All of this could keep unemployment high for some time. If so, the Fed would maintain an easy monetary policy. This policy will continue to cause the dollar to fall in value which in turn will cause domestic inflation to rise.

Emerging Markets

Many emerging foreign markets are experiencing strong GDP. Moreover, several of these countries have interest rates near or even above 10%. When the U.S. prints a lot of money, it creates "hot money" seeking the best returns. These returns are found in the emerging markets which fosters an increase in inflation. Therefore, these countries will eventually begin to tighten their monetary policy which could cause their interest rates to fall and bond prices to appreciate. The growth in these economies should keep demand high on certain commodities.

Developed Countries

There's still a lot of debt out there. Deleveraging will continue for a while and slow growth will result.

Conclusion

If this scenario materializes, I would look at TIPS, oil, gas, silver, agriculture, emerging market bonds (be careful which countries), foreign stocks, and short and ultra-short term domestic bonds. Domestic stocks could continue to rise with QEII, but I would tread cautiously here as well, keeping the allocation on the low end. Finally, I would look for non-U.S. dollar-denominated assets as the dollar has been losing its standard as the world's reserve currency.

Thanks for reading and have a great week!